Saturday, March 22, 2008

When the Bear Stearns fantasy turned into a nightmare

We had a conversation yesterday with a source who is very close to the Bear Stearns situation.

"What went wrong?" we wanted to know. "How could this group of very smart accountants, lawyers, and investment pros have been so wrong about what they had in their own portfolios?"

One day, they think they have a stock worth $30...a few hours later, they sell it for $2--making the whole company worth less than a quarter of the value of their headquarters building. If they had thought it wasn't worth $30, they would have unloaded it then. Instead, they held until forced to turn it over for practically nothing.

"Well" said our source, "They have no reliable way of knowing what their 'assets' are worth. They're not marked to market; they're marked to whatever fantasy they have in their heads at the moment. When the fantasy was positive, the assets were worth something. When the fantasy turned into a nightmare, they panicked and wanted to get rid of them in the worst possible way.

"And the really scary thing is that the other financial institutions are in much the same situation. They don't really know what they have...or what it is worth. There are almost certainly some more horror stories that will be coming out.”